Review: Stockman polemic gloomily convincing

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

David Stockman is a polemicist. “The Great Deformation: The Corruption of Capitalism in America”, the new book by the former adviser to President Ronald Reagan and private equity magnate, is a tirade, arguing over more than 700 pages that crony capitalism and central planning have increasingly corrupted U.S. policy since the Franklin Roosevelt administration.

Stockman has a clear intellectual starting point – the Austrian school which holds that loose monetary policy encourages the build-up of “malinvestment”, inevitably followed by the major economic downturn needed to liquidate assets and operations with no long-term economic value. Stockman sees a long history of politically motivated easy money, with the fiscal deficits and inflation that followed President Richard Nixon’s abandonment of the Bretton Woods gold peg as the key misstep.

The book has flaws. Some of the material, for example about financial misbehaviour in recent years, has been presented well elsewhere. And some judgments are doubtful. For example, the denunciation of Reagan’s defense build-up is ill-considered, as it was relatively modest and peaked at a lower proportion of GDP than was managed under President Dwight Eisenhower, whom Stockman praises.

Excessive vitriol, especially against ex-colleagues such as the gentlemanly George Shultz and Caspar Weinberger, weakens the overall case, even if some of the anger appears deserved. Treasury Secretary and former Goldman Sachs Chairman Hank Paulson did, after all, divert as much as $180 billion from taxpayers to the undeserving American International Group. A withering critique of the 2008 TARP process is highly effective.

Like most Austrian economists, Stockman heavily criticizes excessively expansive monetary policies of the U.S. Federal Reserve, from as far back as the central bank’s decision after the one-day October 1987 stock-market crash to provide massive funding to Wall Street. The “Greenspan put” that began that day eventually led to the 2002-7 housing bubble. Here Stockman is very persuasive. His examination of the nefarious policy interaction between the Fed, the Treasury and Wall Street, whereby monetary and fiscal policies have become ever more stimulative, is perhaps the strongest part of the book.

Some Austrians have sympathy for the formulaic monetarism of Milton Friedman, but Stockman makes a good case against Friedman’s preferred policy of steady expansion of money supply at a fixed rate. He thinks it is unworkable, both because of measurement difficulties and because political pressures on the Fed chairman are too great. However, he recognizes that his preferred alternative of a full Gold Standard, preferably the pre-1914 model without Fed meddling, is probably politically unrealistic.

For anyone whose economics are Austrian, and who agrees with Stockman that crony capitalism and corruption have led both fiscal and monetary policies into a cycle of ever-increasing stimulus and ziggurats of debt, “The Great Deformation” is gloomily persuasive – and bodes ill for the future.

The tone of the book supports press reports that Stockman was a terrible colleague. But at least for Austrians, his fanatical devotion to tight money and his refusal to compromise would be ideal characteristics for the next Fed chairman.